Stock trading volume is the number of total shares that are bought or sold during a particular period of time. Generally speaking, the higher the stock trading volume, the greater the liquidity of the stock. Liquidity is a measure of how easy it is to execute a trade under normal trading conditions.
Stock trading volume can be used by technical analysts to identify possible price movements. If the average daily trading volume deviates from the norm and suddenly is much higher, it can be a strong indicator of an impending shift in the price of a stock.
Trading Volume and Stock Price
Often times, trading volume will spike up or down when impending news is about to be released. A rumor about quarterly earnings a few days before the earnings are actually announced can send the average daily trading volume up by 50 percent or even more.
When the average daily trading volume stays level or declines, it can be a sign that there is less interest in the stock from investor and traders. When stock trading volume goes down, the stock loses some liquidity as there are less buyers and sellers to make trades. This can also cause prices to become more volatile.
Stock Trading and Volume
When stock trading volume is extremely high, an investor may find it easier to execute larger order sizes of shares at desired prices without dealing with too much volatility. Conversely, if an investor tries to buy or sell large blocks of shares of a stock that has low trading volume, the price to execute the trade and fill the order can fluctuate greatly.
Experienced investors pay close attention to both a stock’s trading volume and price movement to see whether a directional shift is sustainable. Knowing how stock trading volume affects a stock’s price can significantly enhance an investor’s strategies.
